LEADING ECON. INDIC.

U.S. Leading Economic Indicators Surge

The Conference Board’s Composite Index of Leading Economic Indicators strengthened 1.0% during January. That raised the y/y change to 6.2%, its strongest since October 2014. The latest increase followed an unrevised 0.6% December gain. (…)

The Index of Coincident Economic Indicators inched 0.1% higher last month (2.2% y/y), following an unrevised 0.3% December rise. (…) The Index of Lagging Economic Indicators gained 0.1% (2.5% y/y) last month after an unrevised 0.7% rise.

Doug Short’s charts:

Here is a chart of the LEI/CEI ratio, which is also a leading indicator of recessions.

INFLATION WATCH

Fed Gauges of Factories’ Pricing Power Add to Signs of Inflation

(…) An unidentified respondent in the most recent survey of manufacturers in the Kansas City Fed District, released on Feb. 22, said materials prices seem to be on the cusp of increasing significantly. And with qualified workers harder to find, inflation is on the way, according to the comment. (…)

Another way to look at it (Haver Analytics):

• Corporate America’s new dilemma: raising prices to cover higher transport costs The drive for cost cuts and higher margins at U.S. trucking and railroad operators is pinching their biggest customers, forcing the likes of General Mills Inc and Hormel Foods Corp to spend more on deliveries and consider raising their own prices as a way to pass along the costs.

(…) Interviews with executives at 10 companies across the food, consumer goods and commodities sectors reveal that many are grappling with how to defend their profit margins as transportation costs climb at nearly double the inflation rate. (…)

To be sure, transportation costs are just a sliver of the price consumers pay at the grocery store. The U.S. Department of Agriculture estimates transportation represents just 3.3 cents of every dollar consumers spend.

But an increase in truck rates over the next 12 months implies a 15-to-18 basis point gross margin headwind for U.S. food companies on average, according to Bernstein analyst Alexia Howard. (…)

For a graphic, click tmsnrt.rs/2oth2Zx

• Powell May Accept Inflation Overshoot to Extend U.S. Expansion

(…) Powell appears before the House Financial Services Committee at 10 a.m. on Feb. 27, with his prepared remarks scheduled for release at 8:30 a.m., and the Senate banking panel on March 1. (…)

• Goldman Says Stocks May Dive 25% If 10-Year Yield Hits 4.5%

(…) Goldman’s base-case scenario calls for a 10-year yield of 3.25 percent by the end of 2018, though a “stress test” out to 4.5 percent indicates such a move would cause stocks to tumble, economist Daan Struyven wrote in a note Saturday. He also said the economy would probably suffer a sharp slowdown but not a recession. (…)

• Morgan Stanley Takes on Goldman, Buffett With Bullish Bond Call

Global Trade Flows Rise at Quickest Rate Since 2011 International trade flows rebounded in 2017 to grow at their fastest pace since 2011, but economists see little prospect of a sustained return to the rapid rates of increase common before the global financial crisis.

The CPB Netherlands Bureau for Economic Policy Analysis said on Friday that the volume of exports and imports of goods was 4.5% higher than in 2016, marking a pickup from the 1.5% rate of expansion in the preceding year, which was the lowest since the global financial crisis. (…)

The World Trade Organization this month said new data suggests trade flows will grow by more than the 3.2% it had forecast for this year. (…)

EARNINGS WATCH

From Thomson Reuters/IBES

Through February 23, 451 companies in the S&P 500 Index have reported earnings for Q4 2017. Of these companies, 76.5% reported earnings above analyst expectations and 14.6% reported earnings below analyst expectations. In a typical quarter (since 1994), 64% of companies beat estimates and 21% miss estimates. Over the past four quarters, 72% of companies beat the estimates and 19% missed estimates.

In aggregate, companies are reporting earnings that are 4.7% above estimates, which is above the 3.1% long-term (since 1994) average surprise factor, and in-line with the 4.7% surprise factor recorded over the past four quarters.

(…) 77.2% reported revenues above analyst expectations and 22.8% reported revenues below analyst expectations. In aggregate, companies are reporting revenues that are 1.4% above estimates.

The estimated earnings growth rate for the S&P 500 for Q4 2017 is 15.3%. If the Energy sector is excluded, the growth rate declines to 13.1%. (…) The estimated revenue growth rate for the S&P 500 for Q4 2017 is 8.2%. If the Energy sector is excluded, the growth rate declines to 7.2%.

The estimated earnings growth rate for the S&P 500 for Q1 2018 is 18.2%. If the Energy sector is excluded, the growth rate declines to 16.2%.

Trailing EPS are now $133.02 and could reach $138 after Q1’18. It is that latter number that is reflected in the chart below:

I used Q1’18 estimates in the chart above to incorporate the first quarter impact of the tax bill, an attempt to “normalize” trailing earnings since there seems to be a 6-7% tax gain baked in for 2018. The risk is that the “non-tax rate” part falls below current estimates as is usually the case, particularly in Q1s. This risk is higher this year because of the cost inflation companies are incurring as discussed above. On the other hand, pre-announcements are strongly positive this year, mitigating this risk, for now. Still March to go…

Anbang’s Rescue Is China’s Too-Big-to-Fail Moment Government is taking over insurer after smaller firms were allowed to collapse in recent years

A Chinese government takeover of Anbang Insurance Group Co. throws a lifeline to its policyholders—support denied frustrated clients of some lesser-known financial firms when those companies hit turbulence before ultimately collapsing.

The China Insurance Regulatory Commission said Friday that a team of financial regulators would manage Anbang for at least a year. It justified the action in the second sentence of a public notice: “to protect the legitimate rights and interests of consumers and safeguard public interests.”

Known abroad for bold acquisitions such as New York City’s Waldorf Astoria Hotel, the unlisted Beijing-based firm owes its war chest to legions of individuals who lent it money when they became policyholders. (…)

The China Insurance Regulatory Commission said its takeover reflected concern that unspecified illegal practices at Anbang “may seriously threaten” its solvency—not that it can’t pay bills today. The commission suggested that it acted before problems grew uncontrollable: “At present, business operations of the group are stable, and the interests of consumers and stakeholders have been protected,” it said in the statement. (…)

Private equity buyouts hit fastest rate since crisis Number of public-to-private deals reached 152 in 2017, totalling $180bn

(…) nearly twice the level of 2016, according to Bain & Co. (…) The all-time high of 196 transactions was hit in 2007, while the record value for such deals was $423bn in 2006. (…) more than half of all PE deals last year were valued at more than 11 times the acquired company’s ebitda. (…)

• Warren Buffett’s Annual Letter: Buffett Laments High Price of Acquisitions

(…) “In our search for new stand-alone businesses, the key qualities we seek are durable competitive strengths; able and high-grade management; good returns on the net tangible assets required to operate the business; opportunities for internal growth at attractive returns; and, finally, a sensible purchase price. That last requirement proved a barrier to virtually all deals we reviewed in 2017, as prices for decent, but far from spectacular, businesses hit an all-time high. Indeed, price seemed almost irrelevant to an army of optimistic purchasers,” Buffett wrote. (…)

Investors’ Zeal to Buy Stocks With Debt Leaves Markets Vulnerable Investors borrowing record sums to bet on stocks exacerbated this month’s selloff, after they were hit with calls to reduce those obligations and forced to sell shares to raise cash.

(…) So-called net margin debt was worth 1.31% of the total value of the New York Stock Exchange last year, according to Goldman Sachs data stretching back to 1980, eclipsing the previous peak of 1.27% reached in the buildup to the tech bubble in 2000. (…)